Wunderlich: Ruby Tuesday's Brand Transformation Continues

In a report published Friday, Wunderlich Securities analyst Robert M. Derrington maintained a Hold rating on Ruby Tuesday, Inc (NYSE: RT), with a price target of $8.

Ruby Tuesday announced F3Q15 (Mar) EPS ex-items at -$0.01, better than the consensus of -$0.04 and Wunderlich's estimate of -$0.03 estimates. This also marked a significant improvement over last year's -$0.07.

"The company's steady cost-cutting initiatives and improved operating controls contributed to operating income improving to $4.6mm from a loss of $2.2mm last year. EPS loss improved to a loss of $0.01 vs. a loss of $0.12 last year and our projected loss of $0.03/Street -$0.04," Derrington wrote.

Ruby Tuesday's revenue declined 3.3 percent y/y in the quarter to $285.9mm. The primary reason for the decline was the closure of 22 company units, resulting in 3 percent fewer Ruby's in operation versus last year. The impact of the revenue deceleration was offset by marginally improved same-store sales.

"On its conference call, management noted Ruby's Q3 check average growth lagged the industry benchmark during the quarter as the company continues to invest in value and affordability," Derrington said.

With strategic cost-cutting initiatives in place and improved operating efficiencies, Ruby Tuesday achieved restaurant margin expansion in 3Q15.

In the report Wunderlich Securities noted, "Management improved some of its key guidance metrics for FY15 including SSS to "flat to -1%" from previous +1% to -1%, restaurant operating margin of 16.5% to 17.0% from previous 16.0% to 17.0%, and SG&A of $117-$119 million from previous $127-$130 million…The company noted its development plans for fiscal 2015 are complete having already opened one co-owned RT, closed 11 RTs, and closed one Lime Fresh."

The company's liquidity situation continues to improve steadily. The quarter ended with $61.2 million of cash in the bank, up significantly from $44.5 million last year. Moreover, its total book debt, at $251.3 million, was lower than last year's $266.9 million.

"We believe management's methodical, studied approach has continued to serve it well in its efforts to improve its sales and operating margins. While we are encouraged by the improvements in the company's operating trends and management presents a credible plan for further improvement to come, given Ruby's historically volatile trends, we maintain a modicum of caution reflecting that volatility," Derrington added.